Ibbotson Associates has put out, for many years, the familiar multi-color mountain chart of stock returns beating bond returns. They contended that equity returns historically were far superior to fixed income returns, and this was used as fuel by many to hold large equity allocations in every market environment, regardless of client circumstances.
The last decade has not been kind to stocks, so now bond returns have exceeded stock returns over the last 40 years. Various commentators have begun to attack Ibbotson’s position by suggesting that retail investors should just own bonds, since they have done better than stocks. Now Ibbotson is firing back with new justifications for why stocks should do better than bonds going forward.
I’m imagining that when economists disagree on important topics like unknowable future returns that they would pull hair or hit each other with pillows if they weren’t able to write journal articles to fight with one another.
Ultimately, the whole argument is silly. No one knows the future, so it is impossible to know who will be right 10 years down the road. Is there some rule that you have to guess which asset will be better? Why not just hold stocks when they are strong, and switch to bonds (or some other asset) when stocks weaken?
—-this article was originally published 7/22/2009. Now that I think about it, maybe there is some murky, unwritten rule that you have to guess which asset will do better—because pundits are still guessing away.
